Cabinet clears tax incentives for govt employees, hikes NPS contribution

In a bid to make retirement income scheme more attractive for central government employees, the government has agreed to chip in a higher 14 per cent of the basic salary of an individual as its contribution to the National Pension System (NPS), a top source said.

The move would benefit over 36 lakh central government employees.

Also, individual contributions, which will continue to be capped at a maximum of 10 per cent of the basic salary, will be exempt from taxable income.

National Pension System (NPS) is a government-sponsored pension scheme that was launched in January 2004 for government employees. However, in 2009, it was opened to all sections.

The scheme allows subscribers to contribute regularly in a pension account during their working life. On retirement, subscribers can withdraw a part of the corpus in a lump sum and use the remaining corpus to buy an annuity to secure a regular income after retirement.

Currently, the minimum employee contribution in NPS is 10 per cent of basic pay and an equal contribution is made by the government.

The Cabinet at its meeting Thursday cleared raising the government's share to NPS to 14 per cent, the source said.

It also cleared tax incentives under Section 80C of Income Tax Act for employee contribution of up to 10 per cent towards NPS. The tax measures are likely to come into effect from April 1, 2019.

Central government employees had approached the government seeking tweaking of the terms of the current 'contribution' based NPS.

Also, the Cabinet has given more flexibility to the government employees to withdraw the amount from NPS corpus at the time of retirement.

Once the changes are notified, central government employees can commute up to 60 per cent of the NPS fund accumulated, up from 40 per cent at present.

Sources said if an employee decides not to commute any portion of the accumulated fund in NPS at the time of maturity and transfers 100 per cent to annuity scheme, then his pension would be more than 50 per cent of his last drawn pay.

Also, employees will have the option to decide on investing their annuity either in fixed income instruments or equities, sources said.

While the government is yet to decide on the date of notification of the new scheme, sources said many of the changes require amendment to the Income Tax Act and hence will come into effect from April 1, 2019.

This formula for changes in the NPS was worked out by the Finance Ministry based on the recommendation of a government-appointed committee, sources said.